The Stigma Enigma: Damages Based on Public Perception of Taint

Diminished value caused by a negative perception of a site calls for compensation for the stigma to satisfy the fundamental concept that an injured party must be made whole. A perception of harm may be all that is needed to support an award of stigma damages. But problems arise because the public perception underlying the stigma may be unsubstantiated, unreasonable, and formed in reaction to publicity. Read how courts in Wisconsin and other jurisdictions are handling this "stigma enigma."

The Stigma Enigma:Damages Based on Public Perception of Taint

Diminished value caused by a negative perception of a site calls for
compensation for the stigma to satisfy the fundamental concept that an
injured party must be made whole. A perception of harm may be all that
is needed to support an award of stigma damages. But problems arise
because the public perception underlying the stigma may be
unsubstantiated, unreasonable, and formed in reaction to publicity. Read
how courts in Wisconsin and other jurisdictions are handling this
"stigma enigma."

Sidebars:

Scenario 1. You represent a group of homeowners from a new
subdivision. All complain that their houses are plagued with cracks in
the walls, damage to foundations, and water seepage into basements. You
learn that the subdivision was built on unsuitable soil. News about the
suit you file against the developer and builder for property damage
makes its way into the local paper. Your clients worry that even if they
prevail and their homes are repaired, public awareness of the problem
has irreparably devalued their homes. Can your clients expect to recover
for this "stigma"?

Scenario 2. You decide to sell your own home. Aside from the
usual fix-up here and fresh paint there, your house has been well kept,
and the sale should yield a nice profit. Then you learn from a home
inspector that the plumbing contractor you hired some time ago evidently
did not fully repair a pesky water leak. You also learn new words, like
stachybotrys chartarum, and - worse - that this mold is growing
in your walls. Thousands of dollars later, your certified mold
remediation expert assures you that the contamination has been abated,
but the expert cannot guarantee that the mold will not return. You put
your house on the market and forthrightly disclose the mold history. At
the mention of the mold, however, potential buyers' interest wanes. You
are forced to sell at a lower price than similar houses would command.
If you sue the plumbing contractor, can you expect to recover damages
for the "stigma" that you are convinced reduced the value of your
home?

Nationwide, plaintiffs increasingly are seeking redress for "stigma
damages." Stigma damages are those tort damages awarded for diminution
in value of specific property due to a negative public perception,
rational or not, and are in addition to any recovery obtained for
physical injury to the property.1 Stigma
represents a loss in value apart from the cost of curing the
contamination itself.2 Plaintiffs seek
stigma damages when they believe the traditional remedy for their injury
will not make them whole.

Stigma damages are not new. Historically, they have been pursued in
several kinds of circumstances, most as a result of a home's sale. Some
of the more exotic examples include a property alleged to be haunted or
that was the site of a gruesome event, such as a suicide, murder, or
notorious criminal activity. More often, however, stigma damages arise
in a more mundane context, such as in situations involving prior
environmental contamination or construction defects. Is public
perception - founded, some say, only on conjecture and
speculation,3 and which may not even be
reasonable4 - too unreliable a basis for an
award of damages?

This article focuses on stigma damages in situations involving
construction defects and environmental contamination, particularly mold
because of its recent prominence in the media.5 It discusses the factors that go into evaluating
the existence and extent of stigma, and the use of experts to prove
stigma damages. Finally, the article examines how some courts in other
states have addressed stigma damages and how stigma damages fit within
the framework of Wisconsin law.

Causes of Stigma

In common parlance, a stigma is a mark against one's reputation.
Similarly, in the context of this article, a stigma is a mark against
the reputation of one's property. Recovery for stigma presents a special
challenge, and courts understandably approach these cases gingerly. For
one thing, stigma damages represent a modification to the traditional
rule of damages, because repair of the defect and diminished property
value generally are considered to be mutually exclusive remedies.6 For another, they can be based on changeable,
imprecise, or even inaccurate public perceptions about the
contamination's effects on health or the environment. One survey
demonstrated that even among well-educated people, perceptions of risk
may differ significantly from actual risk.7
Asked to state the most risky of certain activities or technologies
(nuclear power, smoking, handguns, motor vehicles, and aviation), those
surveyed selected nuclear power when, in fact, it is the least
risky.8

Or consider mold. According to the Wisconsin Division of Public
Health, molds are everywhere, exist naturally outdoors, and have existed
for millions of years.9 To date, no clear
scientific link between mold exposure and adverse health effects has
been established,10 except for persons
whose health already is compromised by, for example, HIV/AIDS or
chemotherapy.11 In fact, in a rare move, in
2000 the Centers for Disease Control retracted its earlier endorsement
of studies finding an association between exposure to
stachybotrys (pronounced "stack-ee-BOT-ris") mold and certain
lung problems in infants.12 Yet even absent
medical or scientific proof of causation, or even if it is discovered
that the danger from mold exposure is more perceived than real, the
perception of causation or danger becomes reality if the perception
causes property values to fall.

Claims of construction defects often allege structural problems due
to water damage (which may lead to mold growth), cracking and shifting
of floors and walls, and foundation problems. Any construction defect
can diminish the value of a house. Usually repair of the defect fully
addresses the problem. In stigma cases, however, plaintiffs are
asserting that remediation of the defect addresses only part of their
damages - that the physical repairs do not compensate them for the loss
in value that results from the lingering public impression that the
property is "damaged goods." As a result, property damage claims arising
out of mold infestation, for example, are brought by building owners
against contractors, architects, and engineers and their insurers for
constructing or designing a building that allowed mold to grow. Although
health concerns also may be an issue, the primary goal is to recover
remediation, reconstruction, and stigma damages, rather than to prove
that mold exposure caused the occupants' medical conditions.

Environmental contamination of a property may include current or
historical exposure to radon, asbestos, toxic wastes, lead, or mold.
Environmental stigma may come about in one of several ways. It may occur
because a property's contamination has not yet been, or is unable to be,
abated. Or it may occur because the property, although uncontaminated
itself, is situated near tainted property. Finally, a negative
perception may persist even after abatement has been accomplished, due
to a fear, perhaps unfounded, that the contamination may be dormant, and
may reappear.

Experts

Proving stigma entails proving both its existence and its extent -
that is, determining whether stigma exists and then placing a dollar
value on it. Using mold litigation as an example, named defendants may
include owners and managers of commercial buildings, home inspectors,
real estate sellers, brokers, manufacturers of building products,
architects, engineers, contractors, and subcontractors, including
roofers, plumbers, and landscapers. In addition to the typical expert
testimony needed in construction defect cases, also required will be
expert testimony regarding whether exposure to airborne indoor mold
causes serious bodily injury. At this time in Wisconsin, such testimony
does not have to clear the Daubert reliability hurdle, but need
only be relevant and helpful to the jury.13

Once the existence of stigma is established, its extent still must be
proved. A few courts may permit stigma damages to be supported by
nonexpert testimony. In one case, for instance, the plaintiff landowners
offered testimony that media reports of contamination led to sudden
decreases in the value of their property.14
This testimony also included evidence of decreased values and offers and
completed sales at these decreased values.15

Generally, however, expert testimony is required. Such testimony may
come from appraisers or economists, who will use a variety of methods to
establish the decreased value, including sales comparison (comparables),
income stream (also called "capitalization" or "cash flow," used for
commercial property), and replacement value.16 Experts may even knock on doors and conduct
surveys of prospective purchasers, local real estate agents, or lenders
in an effort to establish the level of stigma attaching to a particular
site.17

Market value may be affected by several factors. Experts should
consider the following:

Prospective buyers' fear of health effects from exposure to
contaminants;

Whether responsible parties acknowledge their responsibility for the
cleanup;

Whether responsible parties have the financial resources to fund a
cleanup;

Potential buyer liability for future cleanup;

Concern about a regulatory agency's administrative order or cleanup
and abatement order;

Concern that the standards for cleanup will change in the future or
that a regulatory agency might reclassify previously damaged properties
as "remediated";

Uncertainty as to when the cleanup will begin or be completed;

Uncertainty as to the nature of the cleanup and the effect it will
have on the property's appearance or quality of life on the
property;

Fear of recurrence of a problem due to quality, thoroughness, and
permanence of repairs;

Uncertainty over future financing or refinancing related to possible
unwillingness of banks to make conventional loans on the property;
and

Despite the apparent patness of a formula, estimating stigma is not
an exact science, in part because each piece of real estate is unique.
In addition, evaluation entails quantifying the reduction in value on
that particular parcel due to market subjectivity, the permanence of the
stigma, and any change in the stigma that may occur over time. Common
appraisal methods may not work equally well, therefore, for estimation
of remediation costs and estimation of stigma.

Other Perspectives

The concept of stigma recognizes that some residual damage may
survive remediation. In other words, when the cost of repair does not
fully compensate the plaintiffs, they should be compensated for their
remaining loss or they will be permanently deprived of significant
value.20 Courts have attempted to fit
stigma damages into the traditional framework with divergent results.
Some courts accept that remediation may not fully restore market value.
For example, the Third Circuit Court of Appeals, applying Pennsylvania
law, has recognized a claim for diminution of value to property
allegedly contaminated with PCBs (polychlorinated biphenyls).21 Moreover, the court ruled that a showing of
permanent physical damage to the property is not necessary when three
conditions are met: 1) defendants have caused physical damage to
plaintiffs' property; 2) plaintiffs have demonstrated that repair of
this damage will not restore the value of the property; and 3)
plaintiffs have shown that there is ongoing risk to their land.22

Similarly, the Louisiana Supreme Court recently upheld an award for
stigma on property that was cleared of asbestos contamination. In
Bonnette, defendant Conoco arranged for the demolition of
abandoned houses on property it owned. Conoco did not notify the proper
authorities that a predemolition inspection revealed asbestos tiles on
some of the houses. After demolition, a contractor Conoco had hired to
haul away the soil from the site sold it to area residents who spread it
on their lawns. After they discovered that the soil contained a small
amount of asbestos, 143 residents sued. Conoco offered to remediate the
asbestos-containing lawns, and trial was held for four families whose
lawns had been remediated. The plaintiffs, none of whom had sustained an
immediate physical injury, sought recovery for increased risk of
contracting asbestos-related diseases, fear of contracting such
diseases, stigma damages for their allegedly devalued, although
remediated, properties, and punitive damages. The court of appeals
affirmed the trial court's award of damages in all categories. On
review, the supreme court reversed all awards except that for stigma
damages. The supreme court affirmed the 10 percent property devaluation
on the basis of the testimony of the plaintiffs' real estate appraisal
expert that, even though the properties had been fully remediated, a
"stigma effect" remained, such that potential buyers still would be
concerned because "the word 'asbestos' is frightening to people."23

Some courts have allowed plaintiffs to recover stigma damages simply
for proximity to contamination.24 Some
courts have not, relying on the economic loss doctrine, and holding that
alleged diminution in property value based on unfounded third-party
fears relating to contamination on a neighboring property does not give
rise to a claim for private nuisance.25
Other courts have ruled that plaintiffs may not recover for stigma
damages unless contamination actually has spread to their
property.26

Still others have done an about-face. In 1991 an Ohio jury awarded
$6.7 million to 1,713 owners of uncontaminated land based solely on the
land's proximity to a hazardous waste site.27 In 2003 the Ohio Court of Appeals clarified
that, absent a showing of "actual harm," Ohio does not recognize as
compensable "pure environmental stigma, defined as when the value of
real property decreases due solely to public perception or fear of
contamination from a neighboring property."28

In the construction defect context, the California Supreme Court has
refused to allow stigma damages, instead limiting recovery through the
economic loss doctrine.29 Interestingly,
while other courts seem to use the terms interchangeably, the California
Supreme Court draws a distinction between "stigma damages" and
"diminution in value." "In contrast [to stigma damages], diminished
value is simply one of the standard alternative measures of damage for
injury to property. The successful plaintiff in such cases ordinarily
recovers either the diminution in market value attributable to the
injury or the cost of repairs, whichever is less."30

Wisconsin's Approach

Hofbauer

Ryan

Thomas C. Hofbauer,
Loyola Univ.-Chicago 1987, is a partner at McCoy & Hofbauer S.C.,
Waukesha. A considerable amount of his practice is focused on
construction defect litigation. He is admitted to practice in Wisconsin
and Illinois.

Clare T. Ryan, U.W. 1989, is an attorney in private
practice in Pewaukee.

In Wisconsin, the question remains open as to how courts would rule
on a claim for stigma. Statutory causes of action do not provide for
compensation for the public's negative perception of the property. Nor
have Wisconsin courts squarely taken on the issue of whether an owner
can recover damages for residual stigma.

The general principle regarding the measure of damages for defects
and omissions in the performance of a building contract is simply this:
that a party is entitled to have what he or she contracts for, or its
equivalent.31 Thus, the measure of damages
for injury to property has been either the cost to repair the property
or the property's loss in value. In suits arising from construction
contracts, an award for defects and omissions traditionally has been the
lesser of the cost of repairing the defect or supplying the omission or
the diminution in value of a property that cannot be remediated.32 Perhaps significantly, the Jacob court
recognized that it may be necessary to apply both rules to accomplish
full compensation. The court said that property, even once repaired,
still may suffer a diminution in value, and such damages also are
recoverable:

"The proper rule for measuring the recoverable difference between
substantial and complete performance of a building contract is not
necessarily the costs of tearing down the defective work and rebuilding
it so as to conform to the contract. It is the reasonable cost of
remedying defects, so far as that can be done practicably, and the
diminished value of the building so completed because of defects not so
remediable."33

Since Jacobs, the Wisconsin court has reaffirmed its
position that a damages award in a construction defect context need not
be a choice of the two rules.34 In
Magestro, a business owner sued the building contractor for
breach of contract and negligence after the pole building he constructed
cracked and sagged. The court held that in addition to the cost of
repair, lost profits are allowable consequential damages, as
specifically shown by Wisconsin JI-Civil 3710.35

Conclusion

At first blush, recognizing stigma as a part of a plaintiff's
recovery makes sense. Since repairs such as mold, radon, or asbestos
remediation must be disclosed and such disclosure may lead to a negative
perception of the site, any resultant diminution in value, it can be
argued, necessarily calls for compensation for the stigma to satisfy the
fundamental concept that an injured party must be made whole.

On the other hand, stigma brings with it another set of problems,
most notably, inherent uncertainty and unreliability. A perception of
harm may be all that is needed to support an award of stigma
damages.36 The public perception underlying
the stigma may be unsubstantiated, unreasonable, and formed in reaction
to publicity given to certain events.37
Furthermore, the publicity may be skewed by unobjective reporting or a
single sensational incident. As a result, public perception may be
rooted in fear, not fact. Also, the stigma may be transient: as media
attention dies down, property values often rise. And especially in the
context of yet-to-be-remediated environmental contamination, projecting
a post-cleanup stigma value may be highly speculative.38 Accordingly, stigma may be an unreliable measure
of damages. Furthermore, permitting recovery of damages both for a full
repair and for stigma could result in a windfall to a plaintiff, a
result not countenanced by Wisconsin courts.39 It might be said that if the perception of a
stigma is what causes the stigma, this truly is a case of the tail
wagging the dog.

39Jacob, 203 Wis. 2d at
542 ("An owner is entitled to recover for an actual amount, but not a
greater amount"); see alsoNischke v. Farmers &
Merchants Bank, 187 Wis. 2d 96, 118, 522 N.W.2d 542 (Ct. App. 1994)
(court noted that rationale for general rule that property owner's
damages are the lesser of cost of repair or property's diminished value
is to ensure that owner recovers only actual loss and does not realize
windfall).